Loans growth expected to decrease further next year: Banking analysts

Loans growth expected to decrease further next year: Banking analysts

Banks are also expected to further step up efforts next year to stay ahead in the digital revolution, with cybercrime coming in many different guises.

By Nicole Tan
Posted 29 Dec 2015 19:55

SINGAPORE: With a cloudy economic outlook for next year, Singapore banks are likely to see a squeeze on their earnings. According to banking analysts, loans growth is expected to decrease even further as a result, and credit risk may go up.

Meanwhile, banks are expected to further step up efforts next year to stay ahead in the digital revolution, with cybercrime coming in different guises, from personal data theft to pilfering funds.

Banks in Singapore have also cited criminality as the top concern they currently face, in a recent industry survey by PricewaterhouseCoopers (PwC). Amid a fast-evolving digital landscape, observers said the biggest challenges facing banks in Singapore are technology-related.

PwC Singapore Assurance & Financial Services partner, Karen Loon, said: "The top risk was around criminality which relates to risk of cyber (technology), also money laundering and tax. So that's interesting because while there's been a lot of concern globally, the banks are doing quite a lot to try to improve the environment around cyber (technology) together with regulators.

“The second area is around technology risk. Technology risk is really around the concern around the core banking systems not being able to cope."

While banks upgrade internal infrastructure to cope with changes in technology, analysts said the external environment also presents increasingly significant challenges to growing the topline.

LOAN GROWTH EXPECTED TO SLOW

For the whole of 2015, analysts expect growth in the overall loan books for Singapore banks to come in at about 5 per cent. However, they warned that this could slow down even further in 2016.

Standard & Poor's Financial Services Ratings Director, Ivan Tan, said: "Interest income of Singapore banks is the bulk of profitability or revenue source, which means the net profit will also face some headwinds.

“Between 2013 and 2015, while domestic growth has slowed down, overseas growth was able to compensate for slowness in domestic growth. But now, with China-led regional slowdown, even the overseas loan expansion has come down as well. So on the whole, we'll be seeing slower loans growth of between 3 and 5 per cent for 2016."

Slowdown in the region is also expected to put pressure on asset quality. According to the Monetary Authority of Singapore's Financial Stability report in November, non-performing loans made up about 1.5 per cent of Singapore banks' overall loan books in the third quarter of 2015, up from 1.1 per cent a year ago.

The fallout in commodities prices and slowdown in regional economies were cited as the main macroeconomic concerns.

UBS Wealth Management Chief Investment Officer for Southern APAC, Kelvin Tay, said: "Banks exposed to commodity sector, in particular oil and gas, and banks exposed to ASEAN itself, will probably be more vulnerable to banks not exposed to these areas.

“We think ASEAN is probably going through a structural and cyclical slowdown that will last for at least the next three years."

Another credit risk, analysts said, is the anticipated rise in interest rates as the US Federal Reserve normalises monetary policy. Still, higher interest rates are seen as a double-edged sword, with higher interest margins helping to support interest income.

"Net-net, the increase in interest margins on the loan was still more than able to offset the incremental credit cost they have, so banks are better off in that sense," said Mr Tan. "But overall if you take into account slower loans growth, and higher credit cost they have to set aside, the profit upside is not that much."

Despite a challenging external environment, observers said Singapore lenders remain resilient, with strong capital and liquidity buffers to withstand shocks. Still, analysts have said 2016 is likely to be a cautious year, as the banks adopt a more defensive stance and focus on maintaining loan quality and keeping costs low.

- CNA/xk

- wong chee tat :)